Most Tax Rates and Breaks Remain the Same for 2011 and 2012

The 2010 Tax Relief Act has set the tax rates and breaks for 2011 and 2012. Personal income tax rates and investment rates will remain unchanged. Seniors will see a charitable tax break for their IRA holdings. Here's the detail...

*Income tax rates unchanged:

Your personal income tax rate schedules will remain the same. That means the 6 separate marginal rate structure ranging from 10% to 35% as used for 2010 remain in effect.

*Investment rax rated unchanged:

Your investment tax rates will remain the same also. Taxable investment income is made up of interest, dividends and capital gains and losses from sales in that year. All interest income, such as from a CD, bank interest or bond interest, is added to your working income and, therefore, subject to your highest marginal income tax bracket rate.

Because of government taxation rules, all dividends are either qualified dividends or nonqualified dividends. Qualified dividends generally come from American-based corporations.

Dividends are paid at least yearly and normally treated just like interest - so they're subject to your highest marginal income tax rate. But qualified dividends (which are designated so on your 1099-Div) are taxed the same as long term capital gains.

When you buy and later sell a capital asset such as stocks, bonds, or mutual funds, your capital gain (or loss) is the excess (deficit) of your selling price over your buying price. The tax rate applied to your gain depends on how long you held that asset. If you held it longer than one year (by 1 day) you have a long term capital gain (LTCG) or loss; otherwise you have a short term capital gain (STCG) or loss.

All STCGs are treated like interest income and added to your working income and taxed at your highest marginal income tax rate.

All LTCGs are taxed at lower tax rates. Specifically, they - along with qualified dividend income - are taxed at either 0% or 15% depending on what your marginal income tax rate is.

Collectibles are a classification of assets that include stamps, coins, antiques, fine art; their long term capital gain rate is a flat 28% irrespective of marginal tax rate. See table for summary.

Net capital losses are limited to a $3,000 subtraction from your total income per year. Remaining losses can be subtracted in future years.

*Social Security tax rate break for the Self-employed:

There's a slight break in your Social Security tax rates. As, an employee, you have to pay 6.2% of Social Security income tax up to the $108,600 wage base while your employer generally has to match it with 6.2%. But for 2011, your employer only has to pay 4.2%.

But as a self-employed person, you must pay both parts. So self-employeds only have to pay 10.4% Social Security tax for 2011 rather than the usual 12.4%. Unfortunately Medicare tax rates are not changed so they remain at 1.45% each for employees and employers, and 2.9% for self-employeds.


*Charitable Contribution break from IRAs for 701/2 and older:

If you're 701/2 or older may you can donate up to $100,000 of your individual retirement account (IRA) directly to a qualified charity - i.e. a trustee-to-trustee transfer. You can't take it out then donate it.

Under the direct transfer, you don't report the IRS donation as income nor as a charitable deduction. It's a break if you don't have enough itemized deductions to take whatever charitable contribution you make from you IRA. This break is extended for both 2011 and 2012.


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